There is no such thing as a free lunch

Have you been jealous as you read about all of the perks that the Silicon Valley tech workers get? Well, the IRS has been reading about those perks too and is starting to wonder if Uncle Sam is losing out on some tax revenue. Not surprisingly the tax code is not very consistent when it comes to taxing perks given to employees. In some cases the code does not allow a business to deduct an expense, but they employee is not required to add it to their reported income. In other cases, the business gets their deduction, but is required to add the value of the perk to the employees W-2. An example of the latter is “excess” life insurance when the company pays for employee life insurance above the IRS $50,000 limit. Another example that existed until recently was the personal use of a company provided cell-phone.

Of course, what is one persons perk is another person’s appropriate business expense to enhance the productivity of their workforce. An example of the latter started years ago with company provided health care and insurance. The idea to the business was that a healthier workforce had lower absenteeism and was more productive. It has become ingrained in our tax culture that perks (or are they now simply benefits) that have a direct benefit to the business may get the best of both worlds in the tax code – a deduction for the business and no income recognition for the individual.

That old compact may be changing as the government looks for ways to “enhance revenues” (that is increase taxes to the rest of us). Medical benefits are clearly in the cross-hares of the government as they are now listed as the number one “tax expenditure” year after year. Of course, if you are a politician, telling millions of voters they have to suddenly pay tax on something that was “free” for years is probably a good way to lose your job. From a politician’s viewpoint, a better way to accomplish that objective is to make the medical benefits no longer deductable to the company. Then when the company deals with the effective increase in their expense – by reducing or eliminating benefits or other forms of compensation – it is the “evil” business’ fault, not the governments.

And that brings us to all of those free meals that employees of Google, Facebook and other enlightened Tech companies provide. Right now those free meals are in the benefit sweet-spot – deductible to the company and not considered income to the employee – but that may not last for long. The companies say the free meals are an important business expense. They help attract the best workers, and they are a great productivity enhancer by facilitating interaction and idea creation among employees. Of course, trying to figure out how to add the cost of free meals consumed by any individual employee to his or her W-2 would be a nightmare, but the IRS has a solution readily at hand – just eliminate the deductibility of the free meals.

Of course, once you set that precedent (or has it already been set), then it only takes a few smart politicians (OK, it will take 270 of them, and they don’t have to all be smart) to see this as a great way to eliminate those pesky tax expenditures without feeling the wrath of the voter. It’s enough to bring a warm smile to Republicans and Democrats alike.